How to Keep Track of Business Expenses: 3 Easy Steps
As a business owner, you know that learning how to keep track of business expenses is essential for monitoring your cash flow. It helps you see how well your business expenses balance with how much you’re saving.
Unfortunately, tracking business expenses can feel like a lot of extra, fiddly admin. Many small business owners actively resent the time taken away from the operational side of running their business just to track business expenses.
But once you have a good system for tracking business expenses in place, you can see how tracking expenses is one of the accounting foundations that supports your small business’s success.
Here’s what we’ll cover:
- What Are Business Expenses?
- The Benefits of Tracking Business Expenses
- Track Your Business Expenses in 3 Steps
- How Do I Keep the Books for My Small Business?
- Save Time and Money With Better Expense Tracking
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice, please contact an accountant in your area.
What Are Business Expenses?
Business expenses are split into 2 different categories:
- Cost of goods sold: Business expenses that relate to the production of your products.
- General operating expenses: All other essential, day-to-day costs incurred just by running your business, including things like rent, taxes, staff salaries, and permits.
You can further subdivide your small business expenses, which can make them easier to monitor and adjust. For example, separate out fixed and variable costs, and list depreciation and interest individually.
The Benefits of Tracking Business Expenses
Small business expense tracking has several benefits:
- Organized books: Accurate financial statements mean you’re ready for anything—tax time, an IRS audit, or applying for finance.
- Clarity about where you’re spending money in your business. This means you can more easily assess where business expenses can be reduced to improve your cash flow.
- Tax savings: Many small business expenses are tax deductible and can reduce your taxable income. When you’ve tracked your expenses diligently, you have evidence to support any claim for tax deductions, right there in your financial records when tax season comes around.
- Better financial planning: By looking at your expenses and running reports to spot trends like overspending, you can make adjustments and plan accordingly.
- Spot fraud: When you have an eye on your expenses, it’s easier to root out any financial fraud.
Track Your Business Expenses in 3 Steps
Small businesses that track business expenses and regularly engage with their expense reports have more insight into their financial position. As a result, they are more confident about their future business success. Here’s how to get started.
1. Get a Business Bank Account and Credit Card
As you get started in business, a separate business bank account seems like the least of your worries. But freelancers and small businesses may find that the line between their personal expenses and business expenses is pretty blurry. Come tax time, no one wants to be digging for proof of business expenses among grocery and clothing receipts.
Get a separate business bank account so that your business-related expenses are crystal clear. Then use your business accounts for all business purchases.
You’ll need to open:
- A separate bank account for your business finances
- A business savings account
- A business credit card
It also pays to put your business expenses on a credit card. Some credit cards offer cash back on purchases. Others let you collect and redeem points for flights and hotels. Forbes has a list of some of the best business credit cards.
But rewards aren’t the only reason to use a business credit card. It also logs your expenses as a digital transaction that goes through your business bank account, so there’s a record in your bank statement and a receipt. (And if you connect your accounting software, it’s automatically tracked and categorized there.)
Using a dedicated line of credit is better for your business, better at tax time, and definitely better if you get audited to use debit and credit for purchases.
2. Store Receipts Properly
Both paper receipts and digital receipts need to be filed and recorded to ensure your bookkeeping is accurate and you get the deductions you are owed at tax time. So, free up those shoeboxes for your kids’ next diorama. There’s a better way!
If you can avoid paper receipts by using your business credit card, do it. It’s harder to track expenses that are paid for in cash. You really need to be vigilant about keeping and filing paper receipts.
Without the receipts as evidence, you won’t be able to count them as tax deductions. It also means they won’t show up in your business finances documentation, skewing their accuracy.
Here are some strategies to keep paper receipts for your small business expenses organized:
- Keep a separate compartment in your purse, wallet, or bag for business paper receipts. If you can’t commit to filing your receipts daily, set aside time on a weekly basis to put those receipts away. Friday afternoon is one option. And be sure to add this task as a recurring appointment on your calendar.
- Use file folders. At the beginning of the year, make one for each month and file your receipts accordingly. Use either a filing cabinet or an accordion folder. Tracking receipts will be so much easier with a dedicated filing folder for each category.
- Use binders. Buy plastic sleeves and label them by month or category. If you have lots of receipts, organizing by category may make it easier to track expenses come tax time.
- Digitize receipts. An app that allows you to scan and store receipts using your mobile device keeps your receipts stored safely and can feed them automatically into your accounting software.
Don’t forget to write on your receipts what the purpose of the purchase was. A receipt for a $10 sandwich six months ago won’t tell you much unless you write down that it was bought during lunch with a specific client. This turns a random receipt into proof of a business expense.
It’s a good idea to keep a detailed business calendar as a backup, whether on paper or in Google or Outlook. Then you can look back and see who you had lunch with on June 2 of the previous year.
Remember, the IRS requires small business owners to keep their receipts for at least 3 years, along with any other supporting documentation like bank statements.
There are many apps that make it easier to store business expense receipts digitally. Plus, if you scan your business expense receipts, you don’t need paper backups.
The FreshBooks app has a feature that lets you easily photograph and store receipts in the cloud, while automatically adding the expense to your books. This makes it one of the best expense tracker apps out there because you don’t need to waste time individually inputting the amount. Keeping track of your business expense receipts has never been easier.
You’ll also want to track your mileage if you use a vehicle for business purposes. Businesses can claim mileage as a deduction on their taxes.
A business expense tracker app shows you exactly where your money is going and how much you need to budget.
3. Choose an Expense-Tracking Method
When it comes to tracking expenses, you have 2 options: a simple spreadsheet or accounting software.
Option A: Spreadsheets
New small businesses usually start out using spreadsheets for expenses, since it’s free and familiar. Some small business owners continue to use spreadsheets longer term, just because they prefer them.
That said, as your business grows—and your number of expenses grows as a result—a more sophisticated tracking method is going to save you time and help you avoid mistakes. (That usually means some kind of accounting software, which is covered below.)
If you opt to use a spreadsheet, you will be manually recording your expenses day to day. You will need to make your own categories and sort them into specific columns. If you have access to either Excel or Google Sheets, this should be fairly easy to do by following the guidelines below.
Spreadsheets can be easily imported into your accounting software so you can add multiple expenses in batches.
Here’s how to set up your expense-tracking spreadsheet:
- Make a spreadsheet in Excel or Google Sheets with the following columns:
Consider the following expense categories:
- Meals and Entertainment
- Office Rent or Lease
- Office Supplies
If you are importing your expenses into your accounting software, make sure the headings and categories match.
Option B: Accounting Software
Small business expense tracking is a lot less painful than doing it manually if you have the right tool. Accounting software helps automate the process of translating receipts into expense records and keeps expenses organized into categories for tax time. It also allows you to easily see trends in spending and run reports with the data.
With OCR (optical character recognition) receipt-scanning on your mobile phone that feeds right into your accounting software, it’s easy to keep on top of expenses as you go about your day, in between meeting clients or traveling to events.
Business expense tracking software also connects to your bank account and credit card, so your expenses update automatically and daily. Instead of having to print out your receipts and remember every transaction you make throughout the day, a solid expense-tracking app will simply record the important details for you, and keep it organized into IRS-friendly expense categories.
A final benefit: Your subscription to your cloud accounting software is usually tax-deductible.
How Do I Keep the Books for My Small Business?
To set up accounting books for your small business, you’ll need to do 5 things:
1. Choose an Accounting System
Businesses can use one of two systems to track financial transactions: single-entry or double-entry bookkeeping. Most small businesses choose single-entry bookkeeping when they start out, for its ease of use.
Single-entry bookkeeping uses cash-basis accounting. With this system, you record business income when you receive it and expenses when you pay them. This is the simplest method when you use spreadsheets for your bookkeeping.
Growing small businesses will want to transfer to a double-entry method to create basic financial reports like an income statement and balance sheet. Choose accounting software that lets you easily make the switch from single- to double-entry bookkeeping.
As your business grows, accrual-basis accounting may become a necessary transition. This means that you record income at the point of sale, not when cash is received. And you record expenses when consumed, not when they’re paid for.
The accrual method gives you a more accurate picture of your financial standing at any given time, since it accounts for every transaction—not just those where money has already traded hands.
2. Choose a Recording Method
Recording transactions by hand is possible, as is making a custom spreadsheet. But cut down on errors by using accounting software that does the calculations for you. Using small business accounting software keeps all of your financial information efficient and up to date, simplifying the process for you down the line.
If you’re really against doing your own books, you can hire an accountant or in-house bookkeeper, but this route is usually too expensive for a small business.
3. Set Up Accounts
Accounting software will suggest categories for your transactions, but you’ll want to add or subtract categories specific to your business.
Common small business accounts include:
- Checking account
- Savings account
- Credit card
- Accounts payable (money owed by a company)
- Accounts receivable (money owed to a company)
- Petty cash (physical cash on hand)
4. Open a Business Bank Account
Having separate personal and business bank accounts helps at tax time. You can connect your business accounts to your accounting software without worrying about accidentally importing your personal Netflix subscription.
Make sure to reconcile your bank statement monthly with your books. This means checking the records in your accounting software against those in your bank statements.
Checking in on your account statements is a vitally important step to making sure everything is running smoothly. Although accounting software helps immensely in ensuring that no errors are being made, you’ll still need to keep an eye on your business transactions yourself.
For tax reporting purposes, you’ll want to make sure that your information is 100% accurate and up-to-date.
5. Make an Invoice Template
Set up your invoice template, whether in your accounting software or by downloading a template online. Most service-based small businesses offer credit, meaning they send an invoice after a project is complete and let the client pay at a later date.
Payment terms need to be included on each invoice. This should include your contact information, how to pay you and when the invoice is due. Payment processing information ensures that no mistakes occur down the line and that the money will make its way into your account correctly.
Setting up payment terms can help you get paid on time and makes it clear when you should be paid. This gives you a healthy cash flow, which is hugely important for a new small business.
Save Time and Money With Better Expense Tracking
When you manage your business expenses efficiently, you can identify cost savings, get the correct expense deductions, and boost overall income. As your business grows, it’s important to keep a close eye on how much you’re spending and how it’s affecting your profitability. And with the help of FreshBooks accounting software and business expense tracker app, expense management is a whole lot easier and less time-consuming.
About the author
Claire is a freelance writer living in the UK and can be found online at Copy Content Writer Claire loves working with words, thoroughly enjoys the research part of her job, and approaches it with the integrity and scepticism necessary to deliver authoritative writing.